Markets calm on default, for now

In this photo taken Friday, Oct. 4, 2013, President Barack Obama speaks during an exclusive interview with The Associated Press in the White House library in Washington. Some House Republicans are seeking health care concessions from Obama in exchange for approving government financing, ending the shutdown, and want more spending cuts before raising the debt ceiling. The Treasury Department says the nation will hit its borrowing limit around Oct. 17. During the wide-ranging interview Obama didn'
— AP

In this photo taken Friday, Oct. 4, 2013, President Barack Obama speaks during an exclusive interview with The Associated Press in the White House library in Washington. Some House Republicans are seeking health care concessions from Obama in exchange for approving government financing, ending the shutdown, and want more spending cuts before raising the debt ceiling. The Treasury Department says the nation will hit its borrowing limit around Oct. 17. During the wide-ranging interview Obama didn'
/ AP

As the government shutdown grinds on, Washington is refocusing on a more terrifying possibility: the first federal loan default in U.S. history.

Treasury officials say default is likely by the end of the month if Congress and President Barack Obama fail to raise the nation’s debt ceiling.

Lawmakers are right to worry. Aside from an asteroid strike or some other global catastrophe, it’s hard to imagine anything worse for the economy than destroying the status of America’s federal debt as a “risk-free” asset.

But there’s a problem with this doomsday scenario: Hardly anybody was buying it last week.

The bond market was incredibly calm, with some notable exceptions that I’ll get into later. And stocks as measured by the S&P 500 were slightly higher, possibly reflecting Wall Street’s view that political showdowns can be good for the economy if lower deficits are the result.

On balance, it seems that the world’s notoriously jumpy investors have more confidence in politicians than politicians have in themselves.

“There is a better chance of the sun not rising in the east than there is a chance of the U.S. defaulting on its sovereign debt,” said Herb Morgan, the CEO of Efficient Market Advisors, a wholesale investment firm in Del Mar Heights that manages money for retail brokers.

“If there was any potential for a coupon miss by the Treasury, the Treasury (bond) market would be tanking, and it’s not,” he said. “It’s trading at a significant premium.”

Yields on one-month Treasurys jumped above those due in three or six months, suggesting concern about hiccups around the debt ceiling date.

And prices have been rising for credit default swaps, a form of insurance.

But fear hasn’t spread into the broader market for Treasurys, which is the world’s biggest and most liquid, and represents the closest thing to reading investors’ minds.

The relative calm comes as tension rises in Washington.

On Tuesday, the government partially shut down for the first time since 1996, as Congress deadlocked on whether to roll out provisions of the Affordable Care Act and failed to approve a budget.

Yet spending still surpasses tax revenues, so the debt ceiling looms as the next political crisis. Congress has acted 78 times on the debt limit since 1960. But it hasn’t always been easy; both parties used the ceiling as leverage in negotiations.

In a report Thursday, Treasury warned that it had exhausted “extraordinary measures” and will be down to $30 billion by Oct. 17, about enough to last a week or two.

The federal government normally spends $60 billion a day, borrowing about a quarter of the total.

Technically, the U.S. hit its borrowing limit in May, but Treasury has been paying the nation’s bills using a variety of accounting tricks, including not making new investments with cash in the Postal Service pension fund.